It looks like Senate President Stephen Sweeney (D-Gloucester) meant it when he vowed that the Democratic-controlled legislature would stand up to the nation’s most popular Republican governor.

Four days after Democrats on the Senate Judiciary Committee took the unprecedented step of rejecting one of Christie’s state Supreme Court nominees, Senate Budget Committee Chairman Paul Sarlo (D-Bergen) and his colleagues sharply questioned Treasurer Andrew Sidamon-Eristoff not only on revenue projections, but also on net property tax increases, school and municipal aid cuts, one-shot revenues, the size of the surplus, and who would benefit from Christie’s proposed income tax cut.

The unusually contentious three-hour hearing followed a morning session in which David Rosen, budget director for the nonpartisan Office of Legislative Services, predicted that lagging income tax revenues would leave the state with a $144.9 million hole in the current budget and that the administration’s optimistic projection of 7.3 percent revenue growth in the upcoming fiscal year would come up $392 million short.

As to Christie’s repeated public assertion that he and Sweeney can easily find room for compromise on their rival tax cut proposals because “we’re both talking about cutting income taxes,” Sweeney was dismissive.

“My proposal is clearly tied to the property tax -- to giving average New Jerseyans a credit based on their property tax bills -- not to the income tax,” Sweeney said.

“Christie says he wants an income tax cut because when he goes to Chicago and Massachusetts and Wyoming, they all understand what a 10 percent income tax cut is, and that ties into his national agenda," Sweeney added. "But in New Jersey, the problem is property taxes, and his plan does nothing to solve that.”

With Christie seemingly auditioning for a spot on the Republican ticket for vice president, and with his reelection bid just 19 months off, yesterday’s Senate Budget Committee hearing focused more on the political implications of the governor's fiscal policies than it did on the treasurer’s revenue forecasts.

Sarlo laid out the Democratic case against Christie’s record both for a national and a New Jersey audience by pointing out that the governor’s budget proposal “would spend $32.1 billion, the second-largest budget in state history. It assumes a growth in state revenue of 7.3 percent. This is both the most optimistic assumption in the country and a rate more than 50 percent higher than the rates that our neighboring states are using as the base of their budgets.”

Sarlo noted that “the governor proposed this nearly record-breaking spending level only weeks after he once again proudly told a national audience that he had cut $13 billion in spending when he came into office back in 2010.”

But “it is obvious that you can’t claim you cut $13 billion and increase spending by almost 13 percent over two years,” Sarlo insisted, pointing out that state spending rose from $28.5 billion in Christie’s first budget in FY2011 to $32.1 billion in his proposed budget for Fiscal Year 2013.

“If we had attempted to fund all of the commitments we inherited," he said, "we would have had to spend much more than we originally ended up spending. Those commitments were hard-wired into the state budget before this administration took office.”

The treasurer added that Christie should not be criticized for a budget that increased partly because he paid $1.1 billion into the pension system after years of governors failing to make the actuarily required payments.

Sidamon-Eristoff, who cut his political teeth as New York City finance commissioner under Rudy Giuliani and as commissioner of the New York State Department of Taxation and Finance under Republican Governor George Pataki, invoked New York’s new Democratic governor in defending Christie’s proposal for a 10 percent across-the-board income tax cut.

“As New York Governor Cuomo said last October before reducing his state’s top rate below New Jersey’s top rate: ‘The competitiveness of this state is hurt when you’re one of the highest-taxed states in the nation, and businesses and people are more mobile than ever,’” Sidamon-Eristoff noted. “We agree with Governor Cuomo: Rates do matter, especially if, like New Jersey, you have the most progressive tax structure and the highest marginal rates in your region.”
He contended that Cuomo’s phased-in cut in New York’s top marginal rate from 8.97 percent to 8.80 percent makes it imperative for New Jersey’s Democratic-controlled legislature to go along with Christie’s plan to cut New Jersey’s 8.97 percent top rate to 8.07 percent, and to provide the same 10 percent income tax cut to all New Jersey taxpayers.

Sarlo, however, countered that “those earning $250,000 or less pay more in property taxes than income taxes. Only the richest 10 percent pay more in income taxes than in property taxes.” Christie’s plan, he noted, “would provide an average tax cut of $218 per year to [the 95 percent of New Jersey] families earning under $250,000,” while the top 5 percent “would get an average cut of $4,632 and the top 0.6 percent will save an average of $22,577.”

Sweeney’s alternative proposal would provide a phased-in 10 percent property tax credit on income taxes of up to $1,000 for taxpayers making up to $250,000 by providing a 10 percent tax credit on up to $10,000 in property taxes.

A competing Assembly Democratic plan championed by Assembly Majority Leader Lou Greenwald (D-Camden), would provide a 20 percent property tax credit up to $2,000 by adding a “millionaire’s tax “ surcharge that would hike New Jersey’s top income tax rate to 10.75 percent for the 16,000 New Jerseyans who make over $1 million.

Sidamon-Eristoff warned that such a proposal would be counterproductive because “it would take 34 taxpayers at 100,000 to make up revenue of one million dollar filer if that person chooses to leave New Jersey. It’s all about the competitiveness.”

The treasurer and his chief economist, Charles Steindel, did not back off their projection that income tax revenue would grow by 6.3 percent in Fiscal Year 2013 -- the equivalent of 8.4 percent in income tax growth without subtracting $183.3 million for the first phase of Christie’s proposed income tax cut.

“We believe we are in an economic expansion that follows the contours of Fiscal Year 2006 and 2007, which saw income tax increase by 10 percent or more in each of those two fiscal years,” Steindel said.

Sidamon-Eristoff added that New Jersey’s highly progressive income tax structure -- under which the top 1 percent of taxpayers pay 38 percent of the income tax -- provides “a faster acceleration of income tax growth” when Wall Street is booming, Further, said that New Jersey also gets more income tax growth because its tax is based on gross income, rather than on a percentage of adjusted federal income tax payments, which provide higher deductions for taxpayers.

Rosen, the OLS budget director, agreed that New Jersey income tax revenues will rise rapidly, but his nonpartisan team of analysts was not as bullish as Christie’s Treasury Department. In fact, $464 million of the total $537 net forecasting difference between OLS and Treasury is due to lower OLS expectations for income tax projections.

Overall, Rosen noted, “our forecast is an optimistic one. The principal driver is the national economy. If it rebounds, we will. If it doesn’t, we won’t. If it happens, our [progressive income] tax structure gives us an extra boost."

But Rosen stressed, "our employment isn’t back up, and our corporate profits are still considerably below their peak.”

Rosen said in an interview that the $464 million difference in income tax projections between OLS and Treasury reflects a difference in opinion on how much money will be collected from the wealthiest taxpayers -- those who pay their taxes in estimated quarterly filings, rather than primarily through weekly withholding, which is easier for analysts to track.

“Because of our highly progressive rate structure in New Jersey, when higher-income taxpayers do better, we do better,” he explained during the hearing. “States with higher volatility like New Jersey and California see higher rates of growth, particularly in income tax, if there is a stock market-driven recovery.”

While Sidamon-Eristoff is banking on an wealthy taxpayers to bring New Jersey’s lagging income tax collections up to the $11.132 billion level he projected when they make their payments in April, Rosen expects income tax revenues to continue to be flat and to come in $157 million lower than the Treasury Department anticipated when the governor certified the final revenue projections last June.

“What troubles us this spring is that the fourth quarter estimated payments due by January 15th took a real dip this year -- down 8 or 9 percent compared to last year,” Rosen said.

“This is troubling because it suggests what will happen in April. The three other quarters were more positive. We’ve talked to our colleagues in similar states and they saw similar patterns; it’s not a New Jersey thing, it’s national," Rosen asserted.

"My hunch is it’s because of what happened to the stock market last summer. When it dropped 20 percent, liability calculations went down” for high-income taxpayers.
The only tax revenue that is more difficult to predict than the income tax is the corporation business tax, and while OLS is projecting a 7.6 percent growth rate that mirrors the state average over the past two decades, the Christie administration expects 10.9 percent growth -- which would represent a $76 million difference in revenue.

Another major area of disagreement is in casino tax revenue, which has been declining steadily for the past decade due to increasing competition, first from Mohegan Sun in Connecticut, and then from racinos in Delaware, Pennsylvania, and New York.

The Christie administration is projecting a 16 percent revenue increase from $40 million based principally on the opening of the new Revel casino in Atlantic City next week, while OLS is projecting a more modest 7.9 percent revenue of $20 million.

Rosen also noted that the budget is balanced through an increased use of “one-shot” nonrecurring revenues, including a $200 million increased transfer from the Clean Energy Fund, a $200 million transfer from the Affordable Housing and Neighborhood Preservation fund, $75 million from the Mortgage Services Settlement Fund, $45 million from the Unclaimed Personal Property Trust Fund, and -- most important -- $288 million taken out of the current year’s $588 million surplus.

Asked by Sarlo whether the $537 million difference in revenue projections between Treasury and OLS is significant, Rosen replied, “It’s certainly a significant number in a budget with just a $300 million surplus.”